Last Updated on October 30, 2024 by Owen McGab Enaohwo
Starting a business isn’t only about coming up with a new unpreceded idea and having tremendous enthusiasm. However, for a startup to come into the real world, succeed, and start yielding revenues, it will take a lot of effort, time, and money.
As a startup, money is the issue; your limited budget can’t cover the enormous expenses of the business fundamentals. But wait, bootstrapping is no longer the only answer; there’re many ways to fund your startup business. Here’s everything you should know about startup business funding.
Photo credit: invotech
Startup Funding Planning: What Is It and How to Start Planning
Startup funding is the money required to get a business off the ground. There are two primary options to get funded for a startup; the first is by bootstrapping the startup itself, and the second is earning money from fundraisers. In some cases, both methods would apply to a single project at various stages.
Steps to Create a Startup Funding Plan
Define the End Result
Even though it’s a new business, and you won’t have all the money you need from the start, setting a goal budget will guide you through the following steps of the funding plan. You can use a budget planner app to help you create a realistic financial roadmap. You would have a good idea about how much your startup company funding should be, what it needs to flourish, and what is the most suitable funding approach to pursue. Keeping some buffet money for emergencies and unexpected situations is also advisable.
Collect Existing Financial Data
Since it’s a startup, you might not have enough financial data to analyze. Still, you can use whatever is available, even if it’s not too much. A possible solution is to utilize existing financial data of similar startups to come up with reasonable estimates. If you’re asking yourself how to find investors for startups, we’ll let you know soon.
Templates can help with this step. For example, if you’ve incorporated as an LLC and you want to track your financial data accurately, you could include that information in your LLC operating agreement template. By using a template, you can ensure that you don’t miss any details. Plus, it will make it easier for you to collect financial information in the future.
Additionally, incorporating estimation of the LLC cost into your financial projections can provide a comprehensive overview of your startup’s financial status and requirements.
Calculate Project Expenses
Before considering how to get funding for your startup, you should figure out how much it should be; the first step is calculating the fixed costs.
Fixed costs refer to everything the startup might need to run its day-to-day operations. These expenses, also known as overhead costs, include business insurance, salaries, utility bills, corporate travel costs, rental lease payments, property taxes, supplies, and others. You can begin gathering information about overhead expenses with a car insurance quote—one of the most common for businesses. Alternatively, you may use your auto policy as a rough estimate, but consider that you may not need the same coverage for your business. You can also use an online calculator to figure out how much insurance you need for your startup.
Project Revenue
Valuing a pre-revenue startup could be very challenging as the business isn’t launched yet or is still in the earliest stage of operations. Furthermore, you have no idea about the market’s reaction to your service or product.
In this case, the scorecard method is a safe bet. The scorecard method suggests comparing your startup with others from the same industry and region and deriving a logical estimation for the revenues.
This method isn’t accurate; however, it provides you and potential investors with a fundamental insight into startup revenues. If you have already established your company and it has been generating revenues for several years, projecting is easier; as a result, the startup funding options will be variable.
Consider your revenue levers that might raise funding for a startup, for example, the price of service or product, quantity, number of customers, and market perception. For example, market research has found that a 1% increase in price boosts profits by 11%, and such knowledge helps estimate financials and estimate profits better.
Sensitivity Analysis
Sensitivity analysis, also known as what-if analysis, is a financial model that determines how changes in input variables might affect the target variable. This method helps make better decisions about the startup by presenting various outcomes and reliable predictions. Suppose you’re considering crowdfunding for startups as a leading funding source, then a good sensitivity analysis provides valuable information about potential consequences.
Understanding Different Needs at Each Stage of Funding
The new startup funding rounds have transformed the world of business dramatically. The options now are many, and entrepreneurs should no longer worry about their funding, from angel investors to startup crowdfunding and other options.
At this point, many questions arise, like how to use crowdfunding for a startup, but you need to understand that getting funding is a process and will come through many stages until it reaches the end goal. Sometimes, startups go after hiring a business process consultant to handle all the details step by step.
Seed Capital
As the name suggests, seed capital helps plant the initial seeds of a business and start it from the outset. It’s equity-based funding; investments in the startup are exchanged for an equity stake. It applies to venture capital firms and angel investors.
At such an early stage, you will have no idea how to get matched with an angel investor or get venture capital for your startup. Moreover, investors won’t have any clue whether your startup will yield returns on its investment or it won’t be able to repay.
Here’s everything you should know about how to get venture capital funding for your startup, where to find angel investors, and what crowdfunding for a startup is.
Angel Investment
Angel investment is funding made by a company or an individual. They’re known as angel investors, seed investors, or private investors. They provide capital for startups in exchange for ownership shares in the early stages of their growth. An angel investor’s role may not be limited to financing; instead, many private investors have a collectible experience in the business world, and they might act as advisors, mentors, and managers.
You may wonder, “how can I get investors for my startup!”
There are two types of angel investors, affiliated and non-affiliated. The affiliates are wealthy family members, friends, and acquaintances. So, they’re easy to find and collaborate with.
On the other hand, non-affiliated investors could be professionals such as bankers, lawyers, doctors, professional angels, or entrepreneurs. But if you don’t have professional connections, finding an investor might be extremely challenging.
Crowdfunding
Starting crowdfunding for startups is one of the fastest, safest, and most efficient ways to raise startup funding. This crowdfunding strategy revolves around collecting small amounts of capital from an extensive network of individuals, usually through the internet.
The fund-raising individuals could contribute to the startup company funding in return for an exclusive experience or an advanced booking of the product or service the startup is about to launch, known as reward crowdfunding. Indiegogo and Kickstarter are great reward-based crowdfunding sites to find seed investors. Despite their similarities, the two platforms are different, and you can research online to learn more about Indiegogo vs Kickstarter.
On the other hand, if you don’t have anything to offer in return, you can also raise funds as charity or donation. This is known as donation crowdfunding and is very popular amongst NGOs, churches and charities. You can use a website like GoFundMe to get started.
If done right, utilizing a successful marketing strategy, and choosing the right platform, crowdfunding for startups could be a lucrative starting point for the young business. According to Startups, the total crowdfunding raised in rewards and donations is $5.5 billion.
Venture Capital
Venture capital funding is private equity investing. It’s a high-risk, high-return type of startup business funding. Usually, venture capitalists don’t risk their money if the startup has no toehold in the market. Because investors are stakeholders, they will require a portion of ownership as a return for their investment.
Where to get seed funding?
Venture capitalists can be found online on their blogs, LinkedIn, or Twitter. But to get the best deal and find seed investors, you must ace your pitch deck, as it’s the first communication between your startup business and the probable investor.
However, VCs would most likely prefer to meet in person and discuss your accomplishments and plans.
Series B Funding
After the startup business funding has gone through the first stage of financing, either through angel investment, crowdfunding, or venture capital, the business must have established a good presence that qualifies it to round B of funding.
This series usually aims at hiring new talents, increasing productivity, and reaching a wider audience. Unlike seed capital, at this stage, investors are more willing to participate in the startup business funding, as the business has maintained a small foothold in the market; consequently, the risks are relatively low.
Collaborating with the same key players in the seed capital is the wisest idea, as the parties would have developed a specific work plan and agreed on all details. However, since series B financing is critical and will get the startup into the development stage, you must work hard to determine how to get additional startup funding.
Previous investors aren’t enough even if they increase their stake in the business. So, you should attract new investors by repeating the same strategy you did to find seed investors or apply for government funding for startups.
For instance, you should consider the option of getting a Small Business Administration (SBA) backed loan at this stage. This is because there are several things required in SBA application loan scenarios, such as your ability to prove you meet a minimum monthly revenue amount, or have been operating commercially for at least two years. Having that aforementioned foothold in your target market makes loan approval far more likely, and the terms of the funding favorable.
A business loan calculator can be an invaluable tool when considering a Small Business Administration (SBA) backed loan. By inputting various financial parameters, you can quickly estimate your potential loan amounts, monthly payments, and interest rates. This allows you to better understand your financing options and plan accordingly, ensuring you meet the necessary requirements and optimize the terms of your SBA loan application.
Series C and Beyond
Making it to the C round means that your business has proven successful in all aspects; your plan is running, business lists are working, generating revenues, and retaining consumers. But there’s always more to do; that’s not the result.
For example, you can launch a line of innovative products, expand into new markets, implement a brilliant idea, or even prepare for an IPO! You will need extra funding and cash flow regardless of the target.
Unlike the earlier startup business funding stages, the risks are negligible; the company already has a strong presence in the market, and revenues are guaranteed. Angel investors and venture capitalists are not the only investors; instead, fundraisers in stage C include VC firms, private equity firms, banks, and hedge funds.
Closure
Even though funding options for a startup are limited, getting your business funded is no more impossible. Your brilliant idea could be implemented and turned into a real business by following the above mentioned steps and strategies.
Take leadership of the startup funding process, and don’t waste another day while your project awaits. Your startup might be the next big enterprise worldwide; all it needs is enough funds to launch confidently.
Author info:
Gohar Sokhakyan
Short bio: Gohar is a content manager and an SEO expert. She helps in creating and spreading content in a marketing niche. She likes touring, sightseeing, and taking landscape and minimalist pictures in her free time. You can connect with her on Linkedin.
Linkedin URL: https://www.linkedin.com/in/gohar-s-sokhakyan/
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